Nicaragua as seen by Fitch Ratings

The rating agency highlights growth at rates of 5% achieved in the last five years, but estimates that in 2017-18 this will fall to 4.5%, partly due to the effect of a reduction in financial flows from the program with Petrocaribe.

Thursday, August 24, 2017

From a statement issued by Fitch Ratings:

Fitch Ratings-New York-23 August 2017: Fitch Ratings has affirmed Nicaragua's Long-term foreign currency Issuer Default Ratings at 'B+' with a Stable Outlook. 

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS 
Nicaragua's credit ratings reflect its macroeconomic stability, economic performance and prudent public financial management relative to the 'B' median. The ratings are constrained by the sovereign's large external vulnerabilities and structural weaknesses including low per capita income, shallow domestic capital market, social and governance indicators.

Nicaragua's macroeconomic performance is robust with decreased inflation. The economy has expanded at an average annual rate of 5.2% over the past five years, higher than the 'B' median of 3.5%. External factors (U.S. export demand, low international oil prices, foreign investment receipts and access to external financing) remain broadly supportive for growth. Fitch expects economic growth to moderate slightly toward its 4.5% potential rate in 2017-2018, reflecting reduced investment and consumption stimulus from Venezuela's PetroCaribe programme. 

Consumer price inflation has converged with the 'B' median. Inflation, which averaged 3.5% in 2016 and was 3.1% yoy in July, has been subdued by low, stable fuel import prices in the context of the predictable crawling peg currency regime.

Nicaragua's recent fiscal performance has supported its credit profile relative to peers. The general government debt and interest burdens are moderate at 41.9% of GDP in 2016 and 4% of revenues in 2017, respectively, and below the 'B' median. The central government has a track record of running the budget with a zero primary balance. 

However, Fitch expects larger general government deficits to gradually increase the debt trajectory beginning in 2019, reversing the previous trend of falling debt levels. Fitch also expects the general government deficit to increase to 1.8% of GDP in 2017, up from 1.6% of GDP in 2016, driven by a step-up in infrastructure outlays and the social security institute (INSS) operational deficit. The fund's operational deficit has increased in recent years to 0.4% of GDP in 2016 and is currently financed from the scheme's reserves (estimated by the IMF to be depleted in 2019), limiting immediate pressure on the debt trajectory. Fitch expects that structural reforms will be required to balance the INSS fund and that the earliest political window for passage of reforms may not occur until 2018 (after the November 2017 municipal elections). 

Fitch expects the government will continue to meet its financing needs, USD356 million in 2017, with close to USD100 million domestic issuance and multilateral credits. Fitch expects that the financial and external risks from the U.S. congressional NICA Act bill, if passed, would be muted by the limited size of the U.S. voting shares in the affected multilateral lenders. 

PetroCaribe risks to public and external finances appear manageable. The Venezuelan PetroCaribe programme, which provided FDI and external loans with concessional terms to the Nicaraguan private sector, is winding down. Private external debt to Venezuela totalled USD3.2 billion or 24.8% of GDP in 2016. At current oil prices, Fitch expects a net outflow of funds in 2017 as private borrowers begin repaying close to USD200 million per year during 2017-2019. The government has already absorbed into the budget 0.4% of GDP in related social programmes. The balance-of-payments risks are reduced by PetroCaribe's concessional debt service terms, the central bank's external liquidity (USD2.6 billion net international reserves and a USD200 million contingent line), and moderating import demand. 

Nicaragua remains vulnerable to other shocks. More than 80% of government debt is foreign-currency denominated and so is exposed to exchange-rate risk. The government has less financing flexibility relative to some 'B' and 'BB' rated peers, reflecting the underdeveloped domestic capital market and a preference for lower-interest official credits for its external financing needs. 

Nicaragua has large external vulnerabilities. The current account deficit, forecast at 8.4% of GDP in 2017, is large relative to the 'B' median of 5.5% of GDP and those of its Central American neighbors, although FDI finances three-quarters. Its exports, although diversifying, are comparatively intense in agricultural commodities while fuel imports are substantial. The financial system and financial contracts are highly dollarized, driven in part by the stabilized currency arrangement. Net external debt, 91.5% of current external receipts (CXR) in 2016, surpasses the 'B' median of 68.2%. 

The central bank maintains external liquidity and contingent credit lines from multilateral banks to offset shocks. Net international reserves cover 3.6 months of current external payments and support Nicaragua's international liquidity ratio at 200% of current external debt service and short-term external liabilities. Nicaragua's external debt service is low at 10.7% of CXR in 2017. 

The Ortega administration maintains a stable macroeconomic policy environment supported by private-sector consultation on economic policy. However, Nicaragua's governance indicators are in line with the 'B' median. The 2016 national elections further centralized political institutions as President Ortega of the FSLN Party won his third consecutive term since 2006, the first lady won the vice presidency, and the FSLN enlarged its legislative majority. 

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Nicaragua a score equivalent to a rating of 'B' on the Long-term FC IDR scale. 

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

--Public finances: +1 notch, reflecting that Nicaragua has a track record of prudent public financial management, which has supported improving macro stability and domestic debt reduction. External debt relief has also lowered general government debt.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.



More on this topic

Nicaragua: Slight Improvement in Risk Outlook

November 2019

Fitch Ratings decided to keep the country's risk rating at B, but changed the outlook from negative to stable, arguing that there are some signs of stabilization of Central Bank reserves and commercial bank deposits.

The revision of the outlook reflects the stabilization of central bank reserves and commercial bank deposits, a significant fiscal adjustment and social security reform that have reduced domestic financing needs and a pronounced external rebalancing that has facilitated the external financing requirement, the rating agency reported.

El Salvador: Risk Rating Confirmed

June 2019

"The 'B-' rating reflects the recent history of local currency defaults, as well as the political uncertainties influencing congressional approval of key economic reform measures."

This is the second consecutive year that the agency decided not to change the country's rating, as Fitch Ratings reported a year ago that it had decided to maintain the rating of foreign currency debt at "B-", and on that occasion argued that political tensions made it difficult to reach agreements on government financing.

Fitch Downgrades Nicaragua to 'B'

June 2018

The downgrade and Outlook change reflect increasing political instability and the corresponding deterioration of Nicaragua's investment, economic growth, and public finance outlook

From a statement issued by Fitch Ratings:

Fitch Ratings-New York-22 June 2018: Fitch Ratings has downgraded Nicaragua's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B' from 'B+'. The Outlook is Negative. 

Nicaragua Gets B+ Credit Rating

December 2015

The upward trend in economic growth, prudent fiscal policy and debt reduction explain the B + grade with a stable outlook given by Fitch Ratings.

From the press release by Fitch Ratings:

Fitch Ratings-New York-16 December 2015: Fitch Ratings has assigned first-time ratings to Nicaragua as follows:

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